The history of Dexia illustrates how we arrived at this point.

This morning's top news from Europe is that Dexia SA (DXBGF.PK), BNP Paribas SA (BNP.PA) and Societe Generale SA (GLE.PA) are pushing back against European regulatory demands that they accept more losses on the Greek government debt they are holding.

Of those three banks, Dexia is the most interesting for U.S. market. The Wall Street Journalpublished a good piece this morning outlining why a bank that few in this country have ever heard of could be important. It's a good read but the gist is that Dexia is a major player in the U.S. municipal bond market, acting as a backstop to approximately $10 billion in variable-rate muni funding for cities and towns here in the U.S. Yes, variable-rate. I won't steal the reporters' thunder by rehashing their explanation, but you probably get the picture. If not, read the article.

So Dexia is interesting. This morning while going through some Dexia-issued prospectuses I came across what at first looks like a routine business history and timeline for Dexia Group. In a word, it is stunning. For it illustrates in one place where banking and financial markets truly began to go off the rails, the point in time where complexity began to go hyperbolic and the velocity of transactions had to increase in order for everyone to remain upright on the treadmill.

Dexia has four core business lines. Perhaps the most important for U.S. markets is the Public/Project Finance and Credit Enhancement, which was created in 1996. The North American subsidiary of this line is Financial Security Assurance, which provides credit enhancement of U.S. municipal bonds. This business line is the largest contributor to Dexia Group results. The other three lines are Retail Financial Services, Investment Management Services, and Treasury and Financial Markets.

History of the Group

1860

Foundation of Crédit Communal de Belgique

1987

Foundation of Crédit Local de France, listed on the Paris Stock Exchange in 1991

Foundation of Dexia, through the business alliance between Crédit Communal de Belgique and Crédit Local de France. The two partners begin operating as a group under a structure organized around two holding companies Dexia Belgium, listed on the Brussels Stock Exchange (BEL20-index), and Dexia France on the French Stock Exchange (CAC 40-index)

1997

Acquisition of a 40% stake in Crediop, the leading player in the Italian local government financing market.

December: Creation of a single holding company, by means of a public offer by Dexia Belgium on Dexia France Shares. Dexia is quoted in Brussels, Paris and Luxembourg. A unified management structure is established for the entire group

2000

June: Dexia realises its first capital increase of EUR 2.3 billion by direct access to the equity market

August: Dexia finalises the acquisitions of FSA, a leading company in credit enhancement for municipal bond issuer in the USA and of the Dutch Bank Labouchere in the Netherlands, which specialised in private banking and asset management.

2001

July: Dexia finalizes the acquisition of Artesia Banking Corporation (Belgium) through a capital increase reserved to Arcofin, Artesia BC’s former sole shareholder. The Dexia Group ranks among the 3 providers of retail services in Belgium: bank and insurance activities are considerably strengthened with BACOB Bank and DVV insurance, the two major subsidiaries of Artesia BC.

July: The offer (Public tender bid) by Dexia for all the shares of Kempen&Co (the Netherlands) is largely accepted. Dexia, through Dexia BIL holds 99.9% of Kempen&Co’s capital. Kempen&Co is a recognised player in the field of asset management, securities, brokerage and corporate finance.

December: increase of the equity interest in Dexia Credip from 60% to 70%.

December: Kempen&Co and Labouchère merge to become Dexia Bank Nederland, providing Dexia with as substantial position in the Dutch market of financial services.

Following the implementation of Belgian “corporate governance” law of August 2, 2002, the former Executive Committee of Dexia was transformed into a Management Board. This name change does not modify the distribution of responsibilities that already existed among the various governing bodies of the company. At the end of 2003 Dexia completed a further stage in its integration process. In November 2003 the Dexia Board of Directors approved the major principles and alignments of a new managerial organisation which came in into being on January 1, 2004.

This is a financial entity that came into being more than 150 years ago. What is fascinating is that, according to this timeline, nothing much really happened between 1860 and 1996. After 1996, however, once Dexia Group was formally founded through the business alliance between Crédit Communal de Belgique and Crédit Local de France, the transactions began to increase in velocity and complexity, mirroring almost exactly what occurred in global finance.

As we now know, what at first looked like a boom in financial engineering and banking profitability, a new era in risk management and purported risk reduction, was instead little more than a veil of calculus draped over a street corner shell game. This is not overstating things. With the veil now torn, the calculus broken, we can see quite clearly that we were only fooling ourselves. Risk was never reduced, only disguised.

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